How to punt into copper exploration like a muppet if you are late to the party: Ivanhoe Electric $IE, Filo Corp $FIL

In it for a long time, not for a good time.

If you haven’t heard about the copper thesis, you have likely been living under a rock.  Former head of commodities at Goldman Sachs, Jeff Currie, has called copper the best trade of his career.  Stanley Druckenmiller says copper is in the tightest position he’s ever studied.

Copper has few substitutes, every once in a while someone says aluminum can be used to conduct electricity, but we tried that during World War II and it catches on fire. The Artificial Intelligence revolution, power generation, data centers, the electrification of Africa, Net Zero carbon fanatics trying to replace heating oil and gas stoves with electric ovens and heat pumps, electric vehicles, urbanization in India and the Middle East.  Copper, copper, copper, and more copper. On top of that, bringing a new copper mine into production is a process that takes years, and not enough new mines were started years ago, so increased demand and non-responsive supply are the big fundamental setup.  

But copper equities have just about doubled in the last few months, even the big players are up 7x since the Covid lows.  There has been a recent pullback, so it’s anybody’s guess where the next leg is from here.  You could get a quick double, or a quick rugpull, damned if I know.  If you are jumping into copper today, you are in it for a long time, not for a good time.  Think five to ten years at least. 

First, there are some threats to the thesis; one of the most amazing stories from the Ukraine War was when there was an energy shortage in Europe and all the energy experts agreed that an LNG import terminal takes five years to build.  Well, it turns out that when it’s an emergency and leadership sidelines the regulators, Germany built one in ten months.  The West doesn’t have to be inefficient, we just choose to be.  Remember when Thomas Jefferson wrote “He has erected a multitude of New Offices, and sent hither swarms of Officers to harrass our people, and eat out their substance,” well now we do it to ourselves through the administrative branch, but I digress.

I do believe the fundamental copper thesis is sound, but when push comes to shove, new supply could be brought online faster than most people believe. It probably won’t be, but it could be.  Beyond that, manufacturers figure out ways to use less of a commodity when prices rise, this has been given a modern term of “thrifting.”  The Chinese are already building EVs with half the copper than they used to.  There are also hundreds of thousands of tons of copper tied up in existing infrastructure that could be recycled and replaced with fiber optic cable.  Not only would some Northeast and Midwest utility companies benefit, but so would Corning (GLW) who last benefited from a fiber optic cable buildout more than two decades ago, and now the dotcom oversupply of cable has finally been used up.

So as a generalist, how does one punt into copper without acquiring any expertise into the space?  Piggy-backing the people who do have that expertise.

 "The history of men is the history of a few men who play a great part in events, and of many millions who are the chorus of the drama." - Leo Tolstoy

One method of investing outside of your own expertise is to find the best capitalist in the space and to hang onto his coattails.  Have you ever seen Ron Baron in a bad mood?  You would smile every day if you backed Elon Musk in 2014 too.

There are two great men in the copper space, Robert Friedland and the Lundin family.  Robert Friedland’s primary company is Ivahnoe Mines (IVN.TO, IVPAF) and has a market cap of $22 billion.  The Lundin family’s primary company is Lundin Mining Corp (LUN.TO, LUNMF) and has a market cap of $11 billion.  Those don’t fit my small cap value degen style, but it’s a viable way to choose a copper miner for a long term investment on a very solid macro thesis. If you are a midcap focused investor, stop here and choose between them.

I prefer to look for companies in the $500 million to $3 billion market cap range, because I believe they have a strong likelihood of being mispriced, and any smaller than that the universe is overwhelmed with bad actors.  As a general rule, the micro cap space is full of swindlers who brag about how many investors they’ve diluted, and the investors put up with this because they are buying lottery tickets, and they believe they just might be lucky enough to have the one that pays out.  That is not my preferred style.

I also prefer mining companies that are in the buildout phase, and not in the explorer phase or the mature phase. Sadly, I cannot have both at the moment, the great men in copper don’t have any small cap buildout phase mining companies for me to jump into.

I would take a hard look at Filo Corp (FIL.TO, FLMMF).  Filo is a pre-buildout company with a 100% ownership stake in the Filo del Sol copper deposit straddling Chile and Argentina.  Filo is at an earlier stage of development than I would normally prefer.  However, it is a Lundin project, and I would not mind hitching my caboose to their freight train.  Filo is 33% owned by Lundin family trusts, and the Lundin family collection of businesses have generated $15 billion of return for shareholders so far, much of that in the Chile and Argentina area. 

One ironic thing about mining stock enthusiasts is that even though the term “picks and shovels” originated from within mining as Levi Strauss and others profited much more from the California gold rush than the miners themselves, mining stock enthusiasts seem uninterested in looking at mining suppliers.  The thesis behind the NVIDIA stock price runup has been all about the “picks and shovels” for the Artificial Intelligence revolution.  I would have thought that mining stock enthusiasts would be more on board looking at mining servicing and suppliers since it is their industry that originated the concept.

Ivanhoe Electric (IE), not to be confused with Ivanhoe Mines, is a mining technology company which has pioneered a technology which uses electric currents to identify copper ore bodies deep in the ground before drilling is used to confirm them.  If copper really gets into a sustained frenzy, there is a possibility that Ivanhoe Electric will find itself the Levi Strauss or the NVIDIA of the copper boom.  Besides that, it hasn’t yet participated in the copper miner price runup, and it is 8% owned by chairman of the board Robert Friedland.  Ivanhoe Electric owns the rights to the Santa Cruz project in Arizona, exclusively on private land, not federal land.  They have a projected feasibility study to be completed in Q2 2025.

So, if I were looking to punt into copper after the current price runup, and as a generalist, I wanted to remediate my own lack of copper expertise with the great men of the industry, I have two small cap degen options.  Filo corp for the Lundin family, and Ivanhoe Electric for Robert Friedland.  In this instance, due to the “picks and shovels” aspect of their proprietary exploration technologies, and the fact that IE hasn’t participated in the copper miner price rally, for me Ivanhoe Electric would be the winner for my marginal dollars in the copper space.  Putting a price target on tech or on mining exploration is a fool’s errand, I have no educated guess what the market cap of those two companies would be in ten years, but I do have confidence that management would only dilute accretively.

Copper is highly sensitive to business cycles due to the industrial demand for copper, so if we had a global recession, the copper miners would become more of a bargain again.  My best guess going forward is that we are still many years away from a traditional business cycle recession, and we may not get that dip to buy.  A lot of market participants are still expecting some sort of economic slowdown from the rise in interest rates, but there is a strong possibility that no slowdown is coming.  I haven’t yet put out a macro musings article to explain why I think this is the case.

Within the small cap copper mining space, there are producing miners which are also building out their next mines, but not with a Lundin or Robert Friedland in control. There is Hudbay Minerals (HBM), Ero Copper (ERO) and Taseko Mines (TGB).  If subscribers demand a deep dive into these three, I would be happy to oblige in a follow up post about punting into copper Part II.  Please let me know in the comments if you would like a follow up on HBM, ERO, and TGB.